Wednesday, September 7, 2011

The New York Times Takes an Editorial Position on the Subject of Encouraging Competition and It’s Inconsistent With Its Position on Atlantic Yards

Unless the government steps in to do something about it, there is often a tendency for desirable free market competition to devolve into monopoly. The relationship of government to monopolies can vary. Sometimes, as with what are often viewed as inherently governmental functions, such as the military and defense, or the provision of roads and bridges, the supply of water or sewage systems, the government is, itself a monopoly. Sometimes, as was once the case with the phone company or is now the case with the supply of electrical power through companies like Con Edison, the government consents to the existence of private monopolies regulated for the public benefit. But in most situations the presumption is that the government should step in using the tools of antitrust law to break up monopolies and ensure the benefits of a vital and energetic competitive market.

Proclaiming the Benefits of Competition- Selectively

Last week the New York Times ran an editorial premised on the widely held assumption that a competitive market is good and should therefore be fostered by government. The editorial endorsed the Justice Department’s opposition, with a antitrust lawsuit it just filed to block “AT&T’s $39 billion attempt to buy the nation’s fourth-largest carrier, T-Mobile.” See: Protecting Innovation and Competition, September 1, 2011.

The Times provided a bromidic analysis of why the government action supporting competition is desirable:

The merger poses a clear anticompetitive threat. Not only would it give AT&T more than 40 percent of the market, it would take out a scrappy and innovative rival that competed profitably by offering cheaper service plans and took risks others would not.

But providing lip service to bromides is not the same as intellectual analysis or the deeper thinking necessary to achieve a consistent or intellectually honest world view. At the same time that the Times is spouting off about the presumed benefit of economic competition it has supported the quashing of competition for Forest City Ratner, the real estate developer and governmental subsidy collector with which it partnered to create its new Times headquarters.

The Times has been a key supporter of the creation of Ratner’s Atlantic Yards mega-monopoly. The creation of Atlantic Yards involves the Ratner firm’s taking out of the scrappy and innovative rival development on 22 acres of developable and highly desirable land immediately adjacent to eight acres that was already owned by Ratner. Altogether, this gives Ratner monopolistic and anticompetitive ownership of about 50+ acres of prime up-zoned real estate sitting astride Brooklyn’s key subway arteries. (See the above two visuals.)

AT&T’s attempted acquisition of T-Mobile is interesting because it revisits an industry where the monopoly of the Bell Telephone Company was once famously permitted as an exception to the antitrust laws. In his book, “The Master Switch: The Rise and Fall of Information Empires ” Columbia Law School professor Tim Wu explains how this happened. It involved something known as the Kingsbury Commitment of 1913.

The Roosevelt and Taft administration were vigorously enforcing recent new laws, including the Sherman Act to, for instance, break up Rockefeller’s Standard Oil into thirty-five pieces. The Bell system was not yet a complete 100% monopoly but under its president, Theodor Vail, it was engaging in anticompetitive conduct very similar to Rockefeller’s that was fast turning it into one. According to Professor Wu “there was every reason to think” that the government would break up its emerging monopoly. It escaped such break-up because, according to Wu, “Vail turned to the government, agreed to restrain himself, and asked to regulated.”

The Importance of Good Intentions

“The key” to this agreement which left Bell free to “consolidate the industry unmolested” and become the “most lucrative monopoly in history” was, according to Wu, “the earnest profession of a good no one could dispute: making the America the best-connected nation on earth by bringing the wonder of the telephone into every American home.” In making the concession to be regulated Wu says Vail intuitively understood the importance of:

. . . perceptions of right and wrong, good and evil. He understood that the public and the government would rise up against unfairness and greed, though not necessarily against size in and of itself. Had Goliath not cursed David by his gods, David might have kept his sling in his pocket. Vail heralded AT&T as the coming of enlightened monopoly, a public utility of the future. He promised to do no evil and the government bought it.

It was proposed that Bell would provide universal access to its system (something it hadn’t done when it started) and very important, under the agreed-to regulation, such access would be equally open and provided nondiscriminatorily. Wu explains that legally the operative concept being invoked in connection with such regulation was essentially that Bell would be viewed as a “common carrier,” a legal concept that originally evolved with respect to transportation providers like ferry or taxi operators. (In the case of the Bell System the new variant on the term “common calling” was coined.). Wu explains:

At the heart of common carriage is the idea that certain businesses are either so intimately connected, even essential, to the public good, or so inherently powerful- - imagine the water or electric utilities- - that they must be compelled to conduct their affairs in a nondiscriminatory way.

Wu might have added that while one reason businesses may need to be regulated and held to a nondiscriminatory standard is because they are “inherently powerful,” another very compelling reason to do so is when businesses have been made powerful when the government allows them to become a monopoly.

Obliged To Do Good

The Kingsbury Commitment was 1913 and Vail died in 1920 shortly after resigning from the presidency of AT&T. Wu’s assessment is that Vail’s promise was not an empty sales pitch, that he (as opposed to his AT&T successors) was earnestly committed to delivering the public goods:

Vail might well be redeemed by his sense of great power’s great responsibilities and his avowed dedication to the public good to which he always gave more than lip service. . . . He accepted the duties of common carriage, as well as regulated prices, but in return for monopoly’s security and peace of mind. He probably delivered less profit for shareholders than Wall Street might expect today. Vail was acutely aware of how important the telephone network would be to the nation, and there is no evidence that he ever put AT&T’s profitability ahead of its obligation to serve.

Trust a Trust, But Regulate

However sincere Vail was about doing good, Wu is ominously skeptical about the arrangement (and we know from the rest of the book that he speaks with the benefit of informed hindsight given his study of how concentrations of power played out in this and other similar communication industries):

Vail’s view of his firm as the handmaiden of government, the telephone as a public utility, is at once the most sympathetic and scariest element of his vision, Vail saw no harm in and indeed believed in, giants so long as they be friendly giants. He believed that power should be beneficially concentrated, and that with power came great responsibility.

Whatever faith was put in Vail’s corporate giant being friendly, the deal came with the safety of its being regulated just in case it wasn’t friendly. The Atlantic Yards mega-monopoly supported by the New York Times is remarkable for being something quite the opposite of friendly.

The Forest City Ratner monopoly hasn’t consented to be regulated by the government in exchange for its special status. For all intents and purposes it is the reverse. The government doesn’t regulate Forest City Ratner, instead Forest City Ratner has been regulating the government. To the extent that Forest City Ratner’s real estate industry development activities ought to have been subject to time-tested and carefully evolved regulations normally applicable to other participants in the industry, like zoning and review processes such as the City Charter’s ULURP (“Uniform Land Use Review Procedure”) or SEQRA (the “State Environmental Review Act”), Forest City Ratner used its political capturing of the state’s Urban Development Corporation (aka and dba: “The Empire State Development Corporation”) in order regulate government and effectively avoid any meaningful application of these or similar restraints as well as the public protection that was thereby intended.

Similarly, when IRS regulations said that interest on bonds issued for the Forest City Ratner arena (now the Ratner/Prokhorov “Barclays” arena) would be subject to income tax, New York officials swooped into action to lobby for a special loophole exempting interest on Forest City Ratner’s bonds from the taxes that regulations would have required anyone else to pay. When in 2007 the state legislature planned to enact across-the-board reform of the city's 421a property tax incentive program applicable to the building of new apartment buildings, a special treatment loophole was created to excuse the Atlantic Yards mega-project from supplying affordable housing on the same terms required for any other project.

The list of accommodations to specially excuse the mega-monopoly from all sorts of regulatory and procedural requirements is too extensive to attempt to list them all here. Another escape from regulatory safeguards worth mentioning is how the MTA in connection with the land it was furnishing the developer managed to confer extra benefit and a lowered cost on the project by not complying with provisions of relatively new public authority reform legislation intended to prevent abusive favoritism.

To the extent that government officials are involved in the mega-project at all they, like ESDC’s Arana Hankin, serve largely as PR front men to help insulate Forest City Ratner so the firm doesn’t have to show up and be held to account at public gatherings like meetings about the tsunamic influx of neighborhood rats which Ratner insufficiently obviated even though it was predictably precipitated by the megadevelopment’s construction activities. The net result when such public official pawns run such interference, almost certainly intended, is the insertion of an otherwise unnecessary layer of obfuscating fuzziness.

Promises, Promises. . . Promises?

Absent regulation, all that remains in terms of possible control over the megadevelopment is the evaluations that can be offered as to whether Forest City Ratner is meeting its own public promises. That, however, is a hopeless cause given the firm’s promises of jobs, affordable housing, good design, timely completion, etc. were fictional from the start. Corporate sincerity from a huge monopoly?: We have come a long way from Theodore Vail’s earnest belief that promises were to be honored.

And let's not even get started on the notion that vague and illusory promises will somehow be kept by virtue of unenforceable "community benefit agreements" with so-called "community" groups selected, started and funded by the Ratner organization.

Monopoly by Anointment

Forest City Ratner’s scheme to acquire its vast monopoly could only have been effected via seizure of property from rival private property owners and developers by eminent domain. Whatever public utility arguments could be made back in 1913 favoring a monopoly with respect to Bell System, there is no inherent reason for monopoly ownership of private real estate. Nevertheless that is the purpose for which eminent domain is now being used, rather routinely it seems, in New York State.

That brings us to another important point. In the opening of this piece several variants on a theme were considered: How sometimes government can itself be a monopoly, how sometimes it can consent to a monopoly and how sometimes it uses antitrust law tools to break up monopolies. Atlantic Yards presents a fourth variant not discussed, one prior generations might never have thought to envision . . . .

. . . In 1913, the government didn’t proclaim that AT&T would be a monopoly, (other local phone companies were still in existence); it merely consented that AT&T could continue to grow into a monopoly (albeit by likely engaging in some unfair competitive practices to absorb and consolidate its competitors). In the case of Atlantic Yards (and Columbia), the government is actually anointing a developer as a monopoly where no monopoly would otherwise materialize in the free market. Government is tilting the playing field so as to slide the monopoly into existence by putting the formidable, fiercely anti-competitive tool of eminent domain abuse at the developer’s disposal. Ratner thereby gets to identify and seize 30 contiguous acres (50+ acres in the immediate competitive vicinity) while up in West Harlem Columbia gets 17 contiguous acres in addition to all the other real estate it owns in the vicinity.

Eminent Domain vs. Fair Competition

At its core, even for small pieces of real estate, eminent domain is an inherently anticompetitive tool. It extinguishes a competitor’s interest in a piece of real estate, sidestepping negotiation. In this way the Times, working with its partner Forest City Ratner, was able to use eminent domain to procure the site for its new headquarters at a lower price (and without regard to the intrinsic economic value the displaced business and property owners put on their own property). The Durst Organization similarly was able to obtain the property for its new Bank of America tower a few blocks away near Bryant Park.

This significant disequilibrium in power was more tolerable when, in line with the restrictions originally intended by the federal and New York State constitutions, eminent domain was used sparingly with the government confining its exercise to take no more land than it needed just for the creation of such things as publicly owned roads, fire houses or police stations. As a matter of fairness, takings limited to such purposes benefitted all of the public more or less equally and no one specially. Ironically, whereas eminent domain is often used to create publicly owned roads, the Atlantic Yards megadevelopment is doing the reverse with publicly owned streets, sidewalks and avenues being privatized and made less accessible, even eliminated, for the sake of enhancing the private monopoly. (In the end will there be any effective regulation ensuring the level of public access to the public space taken beyond what the developer may elect?)

Giganticized Eminent Domain

Two changes expanding eminent domain's scope occur when it is enlisted for the goal of supporting private monopolies: a.) it is no longer limited by what government can itself own, afford, and use to benefit the general public, and, b.) the real kicker, the goal of a private real estate monopoly is served by seizing as much land as possible from the competition. Thus we see Forest City Ratner (and Columbia) going after great swaths of acreage for the sake of acreage. Whatever Gordon Gekko’s thinking was when he said “greed is good,” it certainly doesn’t apply to monopolies when they are looking to see how much they can chow down.

Back in the days when great swaths of acreage were seized for urban renewal, ill considered as it typically was, such seizures didn’t have to be driven by anticompetitive monopolism. That wouldn’t be the case when the government was designating the area to be `renewed’ beforehand and subsequently bidding out the acquired land in parcels to multiple owners. But when the pre-identified goal being served is to provide Forest City Ratner with a monopoly it means that a single real estate firm is designated in advance as the future owner of all that will be condemned and then that private firm, not the government, draws the lines around all the property it wants with its incentive to seize as much land as practicable.

Neutering Eminent Domain Regulation

Eminent domain can be cited as a final extreme example where protections of procedural regulation and review were intended, but the Forest City Ratner monopoly, through its capture of the state ESDC, successfully exiled any meaningful application of the protections that were intended for the public.

It must be acknowledged that the stripping of protections against eminent domain has been a continuing process with an arc of events that date back before anointment of the Forest City Ratner monopoly. Unlike some of the other regulation Forest City Ratner has succeeded in evading, the clearly understood need for restraint on the extraordinary power of eminent domain was enshrined in both the federal and New York State constitutions. “Enshrined” is a word that can be used advisedly because to the enormous extent that those protections have been completely avoided they may now be thought of as dead.

Initially, the once extant constitutional protections were placed on a slippery slope slanted toward their eventual demise when the specification that eminent domain could only be exercised to take property for “public use” (the exact words of both the state and federal constitutions) was reinterpreted to mean only that property must be taken for “public purposes.” Much additional ground was no doubt lost when swaths of acreage were taken for the disastrous federal urban renewal programs launched the theoretical purpose of addressing “blight.” Those programs fell out of favor after they were effectively critiqued by Jane Jacobs in her 1961 book, “The Death and Life of Great American Cities.”

It might still have been considered that some of the protections against eminent domain abuse remained on firm ground when in 1967 New York State voters rejected an attempt to change the state constitution so that eminent domain could be used for “economic development” which it was acknowledged the constitution, still unchanged even now, prohibited. (See: Tuesday, November 17, 2009, Be Careful What (Change of Law) You Ask For; You Might NOT Get It: Atlantic Yards and 1967's Rejected NYS Constitutional Amendment. At least, as of then, a swath of acreage could not be turned over to enhance a private monopoly without there being “blight.” Theoretically the protection of procedural regulation and safeguards would ensure that “blight” would not be found to exist where there was none.

The coup de grâce to these protections was delivered with their effective evisceration when ESDC handed over the process of finding blight to a private firm hired by and under the sway of the developer, whose terms of engagement were that they were to do nothing else but find blight. Everyone knows that the Prospect Heights and Park Slope neighborhood property being sized by Ratner (bordering also on thriving Fort Greene), only blocks away from Senator Schumer’s home and an area where he bicycles, is not blighted. This is even acknowledged by Senator Schumer, a supporter of the project although in other contexts Schumer he is theoretically against monopolies running rampant.

Lending Credence to Reflexive Assumptions That Principles of Competition Are Protected

Naturally, we want to consider it a good thing when the New York Times supports the enforcement of the nation’s antitrust laws. There are, after all, convincing arguments that many problems the American economy is currently suffering derive from a widespread, post-Reagan administration consolidation of power across many economic sectors: See, Professor Wu’s book on the telecommunications and entertainment industries or Harper’s and Financial Times contributor Barry C. Lynn’s 2010 book concerning the status of most of the rest of the economy: Cornered: The New Monopoly Capitalism and the Economics of Destruction.* Nevertheless, reflexively editorializing that antitrust enforcement is good without a more thorough appreciation of the extent to which monopolies are being tolerated or the implication of abandoning the principles at stake stands to create the illusion that the public need not worry, that it can count on government protection against monopoly and a press standing by as a vigilant watchdog. That ignores the ease with which shifts in the environment favoring monopolies can go unheralded.

Atlantic Yards illustrates such a significant shift, and how now it can go largely unnoticed and considered unremarkable that government, instead of breaking up and/or regulating monopolies, is now just as likely to align with a monopoly. Rather than use government power to oppose and limit a monopoly, government powers may now actually be lent out to monopolies to enhance their advantage. This is happening while a theoretically top-notch and liberal paper such as the New York Times fails to observe the significance and sound the alarum.

And to recapitulate important points made earlier, the Times' failure to sound the alarum about this shift is not occurring with respect to the kind of monopoly Professor Wu assessed the Vail-run Bell-system to have been circa 1913-1920. It is not occurring with respect to a well-intentioned, well-behaved, profit-minimizing monopoly, that means to honor its promises and commitments. On the contrary, there is the ample evidence that Ratner’s promises were in virtually all instances fictions from the start. Beyond that, measuring by observable conduct, it has been clear that at every juncture, Ratner has sought to shortchange the public in favor of Forest City Ratner's own balance sheet. It is doubtful that anyone can cite a single example where that has not been the case.

PS: Maybe in the much bigger scheme of things, the larger economic picture beyond New York City which the New York Times, increasingly styling itself as a national paper, is attempting to cover, Bruce Ratner (together with his Forest City Ratner organization) could be dismissed as something of an economic punk. But if Ratner, has the ability to persuade government to set aside these principles despite his minor-league status, then what fate can we expect for adherence to protective principle when the really big guys arrive on the scene? For instance, there is the accelerating consolidation of the banking industry with fewer and fewer banks controlling a greater percentage of banking assets. To an extent some of this has even been encouraged by the government as with Bank of America’s absorption of the former Merrill Lynch. And such consolidation is accompanied by those large consolidated banks requesting protections, handouts and assistance such as TARP under the rubric of “too big to fail,” an argument that Bruce Ratner used to obtain many of his accumulating list of concessions from the New York officials.

About Me

NOTICING NEW YORK & NATIONAL NOTICE are both independent entities managed by Michael D. D. White of Hop-Skip Enterprises. Michael D. D. White is an attorney, urban planner and former government public finance and development official. *** Noticing New York covers New York development and associated politics. National Notice covers national policy and economic issues *** Contact: MichaelDDWhite(at)gmail.com